Currency And Inflation

So what is inflation? Where does it come from? What does it actually do?

Whether it’s paper currency (fiat currency, that isn’t directly backed by anything of value), digital or even physical clams, it’s what we use for trading with other people when the economy is too big to do direct trades of I have what you want and you have what I want. It also allows us to store earnings for later spending or investment. If the clamshells are pretty enough, you can even wear them as is. Which, incidentally, works for Gold and Silver too, but that’s a topic for a different post.

So let’s set up a simple example. You have 100 people with an average of $100 each that have, on average, $95 worth of stuff (physical goods, services, etc) to sell. That works out pretty well. Everyone can pretty much get what they want with something left over for saving or investing in increased future productivity. But two of the people, let’s call them the Freds, realize that they can set up a printing press and get more money to spend without having to actually work for it or take it directly from the other 98. So off they go, and before you know it they’ve printed an additional $1000 worth of bills that you can’t tell from the original. Now they get to go on a buying spree.

Of course the amount of stuff available for sale hasn’t increased, or at least not by nearly as much as the money supply. Next thing you know people can’t get what they want because the Freds already bought it with all of their “extra” inflationary money. So the next time around, they realize if they want something they’re going to have to be willing to pay more for it. The prices start to go up. And up. Those who sell for more have more money to buy with though, so they’re not too bad off. Eventually it all settles out to where the prices and dollars available equal back out. Ah, but those Freds still have their printing presses.

Now, let’s look at something interesting. On first glance, it seems that it all comes out in the wash and nothing really changes. But that’s not what happens in reality because of the time it takes for that money to work it’s way through.  Who really benefits the most from the inflated money supply? The Freds, of course. They got to do their buying at the pre-inflation prices. The people they bought from (usually big business) get the extra money when the prices haven’t gone up nearly as much as they eventually will. The big losers? The average Joe that has to pay the inflated prices long before the extra money cycles through the economy enough times to get to him. So the poor get poorer and the rich get richer.


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